Nigeria’s oil and gas industry is plagued by various challenges, ranging from insecurity to the cost of production, policies, and regulatory issues. But among all the challenges confronting the industry, the inability of the Department of Petroleum Resources (DPR) to regulate it in line with global best practices is the biggest of all.
By the law that established it, DPR is the regulator of Nigeria’s oil and gas industry. The Department has a vision “To be a leading regulator in oil and gas sector” and a mission “to ensure the sustainable development of Nigeria’s oil and gas resources across the value chain for our stakeholders through effective regulation while entrenching world-class professionalism, accountability, and transparency.”
Effective regulation of any industry does not only build the confidence of investors, it engenders growth. Crude oil accounts for about 90 percent of Nigeria’s foreign exchange earnings and 70 percent of its revenue. This shows how important the sustainability of the industry is to the country. But with what transpired in the industry in recent months, many investors must be asking if the DPR is for or against them.
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In what many see as a lack of commitment to the rule of law, fairness, and nonchalant attitude towards a stable business climate for investment, the DPR revoked four oil mining licences of Addax Petroleum in April, citing the inability of the company to develop the assets.
After the revocation of the licences, the DPR inaugurated a team of experts to assess the revoked licences from Addax Petroleum to a new operator – Kaztech/Slavic Consortium. It, however, took the intervention of President Muhammadu Buhari, who doubles as the Minister of Petroleum Resources, for the licences to be restored to Addax.
“President Muhammadu Buhari has approved the restoration of the leases on OMLs 123, 124, 126, and 137 to the Nigeria National Petroleum Corporation, NNPC which is in production sharing contract with Addax Petroleum, a company wholly owned by Government of the People’s Republic of China on the blocks. The leases belonging to the Federation were revoked on March 30, 2021.
“This development reaffirms the commitment of President Buhari to the rule of law and sanctity of contracts.
“While directing the Department of Petroleum Resources, DPR to retract the letter of revocation of the leases, the President also directed NNPC to utilize contractual provisions to resolve issues in line with the extant provisions of the Production Sharing Contract arrangement between NNPC and Addax.
“The restoration of the blocks to NNPC will boost the organisation’s portfolio, thereby making the Corporation to, in the long run, boost its crude oil production and in turn increase the revenue it generates to the Federation Account,” a statement issued by the Senior Special Assistant to the President (Media & Publicity, Garba Shehu, on April 23, 2021, read partly.
Similarly, the Department on April 6, 2021, also issued letters revoking 11 Marginal Oil Fields licences. According to the operators of the assets in a Letter to Buhari, they have invested over $400 million in these assets.
They explained that they were not contacted by the DPR or, giving any opportunity to make representation before the regulator issued the letters revoking their licences.
The operators noted that the revocation puts the investment of several State Governments, Nigerian entrepreneurs, and their foreign technical partners in jeopardy, and will add to the problem of Non-Performing Loans (NPLs) for the local banks. As of last year, the oil and gas industry accounted for about $8 billion in debt owed to Nigerian banks.
“Not only are the actions of the DPR at complete variance with the Marginal Field bid guidelines and the duly executed Farm-out Agreements, we are extremely concerned that the DPR has chosen to pursue such a course of action in the midst of a global economic crisis with its resultant impact on the Nigerian economy at large, and in particular the primary economic contributor thereto, being the oil and gas sector.
“The revocation of the licenses will certainly lead to litigation against the Marginal Field Operators by foreign partners and banks who have financed the development of the Marginal Fields, in addition to sending the wrong signal to both Foreign and local investors” the operators stated.
“We have conservatively invested over US$ 400 million in developing the affected fields, with a number of them in production, whilst others are in various advanced stages of development including testing of oil wells, drilling of new wells, construction of production facilities, etc.
“These investments were made despite low crude oil prices, militancy, and insecurity in the Niger Delta region, resulting in frequent shut down/ vandalization of crude export pipelines,” they added.
The Marginal Fields affected and their operators include Atala operated by Bayelsa Oil/CEPL; Dawes Island operated by Eurafric; Ofa operated by Independent Energy; Ke operated by Del-Sigma/Xenoil; Ororo operated by Guarantee/Owena; and Ekeh operated by Movido.
Others are Akjepo operated by Sogenal;, Tsekelewu operated by Sahara/Africa Oil; Tom Shot Bank operated by Associated/Dansaki; Oriri operated by Goland, and Ogedeh operated by Bicta.
In June 2019, DPR also revoked the licences of Pan Ocean Oil Corporation (OML 98); Allied Energy Resources Nigeria, (OML 120 and 121); Express Petroleum and Gas Company (OML 108); Cavendish Petroleum Nigeria (OML 110), and Summit Oil International (OPL 206), for non-payment of royalties.
Oil and gas is the mainstay of Nigeria’s economy, and for that reason, the Federal Government, and the DPR in particular, must ensure that the regulation of the industry is in line with the global best practices. Before licences are revoked, the DPR should ensure that affected companies are contacted and given a fair hearing. Also, the oil and gas industry is a peculiar industry, which means that revocation of licence should not be the immediate punishment for non-payment of royalties, or inability to develop assets.
Revocation of licences does not only lead to loss of jobs, but it also makes investment unattractive. Marginal Fields are exclusively allocated to Nigerian exploration and production companies, and the fact that these companies are indigenous should be enough reason for the DPR not to revoke their licences without giving room for dialogue, to understand their predicament or why they are unable to develop their assets or pay royalties.
Investment in the oil and gas industry is dollar-driven, and access to credit facilities in dollars is usually a big challenge for indigenous oil and gas companies. This is the reason why the DPR needs to be more judicious in carrying out its regulatory roles. The Department needs to work on how it can carry out both administrative penalties and criminal penalties without undermining investors’ confidence. This will be critical in deepening local content in the country as the world pushes towards energy transition.
The recent actions of the DPR do not give investors confidence and show a harsh business environment, which does not speak well on the ease of doing business in the country, especially in the oil and gas industry.
As we look forward to the response of Buhari to the letter written to him by the affected 11 Marginal Field operators, I hope he will do the right thing by directing the DPR to restore the licences to these companies, to save hundreds of jobs that will be lost as a result, and spare the country of facing litigation both home and abroad.